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Argentina’s Got a New Attitude

What a difference an election can make. Just three months after Mauricio Macri became Argentina’s new president, the country is preparing to return to international debt markets for the first time in 15 years with a mid-April debt issuance of $11.68 billion. In lifting the long-standing injunctions that led Argentina to default in 2014, U.S. District Judge Thomas Griesa noted that, “President Macri’s election changed everything.”   Argentina’s debt saga dates back to 2001, when the country defaulted on $82 billion in debt. In two restructurings, in 2005 and 2010, 93 percent of that debt was exchanged for between 25 and 29 cents on the dollar.  Owners of the remaining 7 percent sued in federal court in Manhattan for full restitution. In June 2014, Griesa barred Argentina from making payments to investors holding so-called “exchange bonds” until it had repaid the holdouts.   Macri’s predecessor, Cristina Kirchner, refused to do so, and the country defaulted again in 2014. But Macri’s new government began negotiations with the holdouts at the beginning of February and has signed agreements with investors representing 85 percent of pari passu plaintiff’s claim, at a total estimated cost of $7.7 billion.   Encouraged by the progress, Griesa agreed to lift his injunctions against repaying the exchange bondholders on two conditions. First, the Argentine Congress must revoke two laws – one prohibiting the government from offering better terms to the holdouts than exchange bondholders received, and another that sought to allow Argentina to pay exchange bondholders if they moved their bonds from the United States to Argentina or France. Second, Argentina must actually pay holdouts who agreed to settle by February 29.   Macri has urged the Argentine Congress to pass the necessary legislation to meet Griesa’s conditions, and Credit Suisse’s economists believe legislators will do so by early April, paving the way for a new bond issue shortly before an April 14 payment deadline. Argentinian politicians have said the country could raise as much as $15 billion when all is said and done, with some of that money going to pay debt and interest and some for deficit reduction.   But that first issuance should only be the beginning. Argentinian provinces and businesses are also lining up to sell bonds. Will there be enough demand? Credit Suisse believes so. Dedicated emerging market investors are still underweight Argentinian debt, and better economic prospects compared to other Latin American countries – Credit Suisse expects Argentina’s GDP to grow 3.7 percent in 2017, compared to -1.0 percent in Brazil, 3.0 percent in Chile, and 3.3 percent in Colombia – make the country’s bonds worthy of new consideration. Argentina’s weighting in emerging market bond indices will also increase as it issues more debt, another source of potential demand.   Existing bonds have rallied over the last two weeks, but Credit Suisse analysts believe euro- and dollar-denominated discount bonds – those that took the largest haircuts in the 2005 and 2010 exchanges – still offer some upside. The bank’s analysts also see value in GDP warrants, which offer additional payments to bondholders if economic growth exceeds certain targets, that Argentina issued in 2010 to investors holding defaulted bonds. Credit Suisse doesn’t expect economic growth to trigger a payment until 2017, but notes that yields are higher on the warrants than on the country’s sovereign debt and Argentina’s economic prospects are improving under the Macri government.   Beyond bringing the country out of capital market exile, Macri’s administration has reduced subsidies to utility companies and eliminated thousands of public-sector jobs in hopes of reducing the deficit from 7.1 percent of GDP to 4.8 percent this year. Macri also lifted capital controls in December, causing the peso to depreciate 35 percent against the U.S. dollar, and scrapped export taxes on agricultural products. The measures are expected to help farmers sell their crops and fuel foreign investment, bringing in more foreign currency to shore up the country’s shrinking reserves.   The devaluation is having less of an effect on inflation than in 2014, when the central bank dialed back its defense of the peso out of concern for dwindling foreign exchange reserves. Even so, Credit Suisse economists believe that annual inflation will likely come in at more than 30 percent in February. Whether it slows from there largely depends on wage negotiations with the country’s unions. The bank’s analysts say that if inflation is to fall, it is crucial that negotiations keep annual wage increases below 30 percent. The coming months will be a crucial test of the administration’s reforms, but Credit Suisse’s Argentina economists say the country is on the right track to returning to economic normalcy. 

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The Vijay Mallya story: How the King of Good Times made bakras of 17 banks.

The flamboyant liquor baron, Vijay Mallya, once hailed as the King of Good Times and Indian version of Richard Branson, is being chased by almost every institution in the country — the banks, regulators and, finally, the judiciary — for the Rs 9,000 crores he owes to the lenders. How did Mallya fall to his current plight, where he is personally held accountable for the failure of the airline business Kingfisher Airlines and delayed repayment of loans? The answer lies in a decision forced on him by lenders in 2010 to give a second lease of life to the airline that was then on the brink of a collapse.

“Mallya had his back against the wall. Banks insisted him to offer personal guarantees for any further lending,” said a retired banker, who was previously with State Bank of India (SBI), on condition of anonymity.

“Otherwise, there was no reason why Mallya is personally held responsible for the repayment of the loan (Rs 9,000 crore now including the accrued interest amount). There are bigger stressed borrowers (companies) around,” the banker said, giving examples like Bhushan Steel and Winsome Diamonds.

The Kingfisher Airline, grounded in 2012, never made profit in its eight years of operations. When Mallya approached the group of lenders for further lending in 2010, there was serious differences of opinion among the group of senior bankers in SBI, and other banks in the consortium, on why should they lend to the airline again. But, the majority decision was to take the big risk again and lend to Mallya.

“It was, in a way, throwing good money after bad (since the KFA exposure was already stressed),” the banker quoted earlier said. “But, if we didn’t do that at that point, the exposure till then would have gone bad instantly. No one wanted that to happen. There was no option before us,” said the official. But, everyone knew what was in the store, though no one said anything in the discussion room. “The mood was partly that of helplessness and partly optimism,” the banker said.

Bankers were optimistic because Mallya himself was hopeful of turning around the airline, even though the entire aviation industry was groping in darkness. Ironically, however, despite Mallya’s optimism, everyone saw the writing on the wall.

Mounting losses

In March 2012, Kingsiher halted its international operations to Europe and Asian countries and cut down local flights to 110-125 a day with a fleet of 20 planes from 340 flights earlier to save money. By October 2012, the bird flapped its wings for the last time. Since then, it hasn’t seen the skies.

Kingfisher, once the second-largest airline in India, had little chances of resuming its operations since the necessary regulatory approvals were not in sight and its balance sheet was bleeding. The company’s losses had widened to Rs 2,142 crore for its fiscal fourth quarter ending in March 2013, compared with a net loss of Rs 1,150 crores a year earlier. The accumulated losses as of March 2013 stood at a whopping Rs 16,023 crore.

Its dues had mounted to over Rs 15,000 –Rs 16,000 crore to banks, airports and others and its flying licences expired at the end of last year. The death bells were begin to ring. In his desperation to revive the airline, Mallya twice submitted revival plans to the aviation regulator, with parent UB Group committing initial funding, but with no luck. In its eight-year life, the airline never made profit even once.

Mallya remained optimistic though not to lose the airline’s licence. “We have not submitted an ambitious plan. We have submitted a holding plan," Mallya told reporters, while the government wasn’t convinced. "The problem is in the last two to three months, he's given so many plans and he's not adhered to any of them," the then Aviation Minister Ajit Singh told reporters in New Delhi.

Panic grips banks

Panic was beginning to set in in the banking industry, especially state-run banks, which were the majority in the banking consortium. After all, banks had to answer a lot to shareholders not just for further lending to Mallya in 2010, but for offering generous loan recast facilities and converting the debt if Kingfisher to equity at a huge premium.

In early 2011, the bank consortium including SBI had converted debt amounting to Rs 1,400 crore into equity at a 60 percent premium to the prevailing market price. Going by the stock exchange data, on March 31, there was preferential allotment to SBI and ICICI Bank due to conversion of compulsorily convertible preference shares into equity shares at a price of Rs 64.48 each. Remember, on that day, KFA shares closed at Rs 39.90 on the BSE.

"Within a few months, the share value had eroded so much that banks were put in a difficult position,” said the banker quoted earlier. Kingfisher last traded at Rs 1.36 on the BSE on 22 June 2015. The entire loan restructuring exercise to Kingfisher was done without any special dispensation from the RBI, which means that banks had to make heavy provisioning on their books, hoping that the airline will revive sooner or later and pay back the money. That never happened.

Finally, Kingfisher, was declared an NPA by most banks, including SBI, towards the end of 2011 and beginning of 2012. The majority burden of Kingfisher loans was on government-owned banks. The smartest in the lot was ICICI Bank, which managed to sell its entire Rs 430 crore Kingfisher loan exposure to a debt fund managed by the Kolkata-based Srei Infrastructure Finance Ltd in mid-2012. The sarkari banks were the real bakaras in the entire story.

So what lies ahead?

Banks' chances of getting their money back from Mallya are very unlikely since Kingfisher hardly has any assets left for banks. Even if banks go ahead and sell Kingfisher assets such as the Kingfisher House in Mumbai, it will fetch only a fraction of what is at stake. The only hope for banks is if Mallya himself have a change of mind and decides to pay back banks from his personal wealth (Mallya has shares worth Rs7000 crore in various companies and lot more in fixed assets).

"But, all that will happen if he returns to the country and say he will pay back,” the banker said, adding that bankers are more irked by Mallya flaunting his wealth publicly even now when thousands of crores are at stake. According to reports Mallya already received $40 million of his severance pay fro Diageo before his flew to UK. Can the final battle between banks, led by SBI, and Mallya in Supreme Court and Bangalore DRT result in lenders getting their money back. Chances are less.

LI-WI will replace WI-FI

Li-Fi could soon replace Wi-Fi with speeds up to 100 times faster BRYAN NELSON New visible light-based wireless connection could allow you to download 23 DVDs in 1 second.   Your LED lamps could soon provide you with blazing-fast Internet speeds, leaving your old Wi-Fi connection in the dust. It's all thanks to a new technology called Li-Fi, short for "light fidelity," which transmits information wirelessly via visible light. The technology was recently demonstrated at the Mobile World Congress, the world's biggest mobile fair, by French startup Oledcomm, and it's already drawing interest from Apple for integration into the upcoming iPhone 7. The thing that makes Li-Fi so revolutionary is its incredible speeds, up to 100 times faster than Wi-Fi. To put that in perspective, you could download 23 DVDs in just one second using a Li-Fi connection. Laboratory tests have shown speeds of over 200 Gbps. It could solve the bottleneck problem that currently exists with our Wi-Fi networks, which will only be compounded as an estimated 50 million different objects and devices are expected to be connected to the Internet by 2020. Li-Fi works by making use of the imperceptible flicker of LED lights, which actually blink on and off thousands of times per second. That flickering has been dubbed the "digital equivalent of Morse Code." For all of its advantages, Li-Fi does have one drawback. Because it beams information with visible light, your device has to be in a lit room for it to work. Forget about using it in the dark, or out in the bright sunlight for that matter. Sunlight interferes with the artificial light that is transmitting the information. Li-Fi also can't pass through walls, for the same reason that the light from a closed room doesn't illuminate any surrounding rooms. So there still promises to be plenty of use for Wi-Fi even after Li-Fi gets widely implemented. The idea will be to use them in tandem, to get the benefits of each while canceling out the negatives. Currently Li-Fi is more of a laboratory technology than something you'll find in your local coffee shop, but it may not be long before Li-Fi hotspots start popping up. Deepak Solanki, the founder of Estonian firm Velmenni, which tested Li-fi in an industrial space last year, said he believes the technology will really start to be commercialized within the next two years. That timeline might even be shortened if Apple starts implementing it with the iPhone 7, which is scheduled for release late in 2016.

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After cough syrups, 500 more drugs, including antibiotics and anti-diabetic drugs, may face ban

After last week's ban on 344 medicines, as many as 500 more drugs - including antibiotics and anti-diabetes drugs - may be outlawed for being "irrational", unsafe and ineffective, official sources have said.

Last week, as first reported by TOI, the ministry banned 344 fixed-dose combination (FDC) drugs including commonly-used cough syrups like Phensedyl, Corex and Benadryl.

Now, a senior official says, the ministry is evaluating a list of over 6,000 products, of which at least 1,000 more FDCs are under "severe scrutiny". As many as 500 of those drugs will likely be banned in six months.

"There is primary evidence in around 1,000 cases, which shows these are irrational FDCs. However, in some cases, the data is incomplete so we have asked for further studies. In around 500 cases, we are at the last leg and waiting for some documents," an official told TOI.

The health ministry believes that "irrational" FDCs are causing anti-microbial resistance and in some cases their toxicity is so high they can even lead to organ-failure. There are also concerns that these FDCs being available over-the-counter, without doctors' prescriptions, is leading to their misuse.

"Our objective is to ensure only safe products are available in the market. We have reviewed products for several times and there is evidence from research papers and studies to show these medicines are irrational combinations," the official said. 

In the meanwhile, the Delhi high court on Monday granted pharmaceutical firm Pfizer a stay order, pending a further hearing, on the ban on its popular cough syrup Corex. 

Some drug makers, including Pfizer, have argued that some of the banned drugs have been available in India for around 30 years and so must be safe. Health ministry officials have countered that a long market life isn't enough to prove safety.

"Just because adverse events have not come to notice or have not been reported so far does not mean we ignore scientific evidence showing discrepancies," the official said. 

Officials and health experts say that adverse effects of these drugs are not often reported because patients don't come back to doctors unless these drugs are used repeatedly and lead to severe problems. Also, because of a weak vigilance mechanism, the adverse impact of such drugs is often not reported.

 

While industry estimates have pegged a revenue loss of at least Rs 3,800 crores for the 344 banned FDCs' makers, pharmaceutical firms may have to bear a much wider loss if 500 more drugs are banned. Some industry executives say the cumulative loss could be as much as Rs 10,000 crores.

The total local pharmaceutical retail market is pegged at over Rs 1 lakh crores annually.

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Should we hold banks in our portfolios?

Banking is currently inefficient, costly and riddled with conflicts

©James Ferguson

I

nformation technology has disrupted the entertainment, media and retail businesses and, most recently, the supply of hotel rooms and taxis. Is it going to do the same to finance? My first response is: please. My second response is: yes. As Bill Gates has said, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10. Don’t let yourself be lulled into inaction.” This advice applies to people in the business itself, but also to policymakers.

Finance is an information business. Indeed it already spends a higher share of its revenues on information technology than any other. It seems ripe for disruption by information technologies. Consider its three essential functions: payment; intermediation between savings and investment; and insurance. All these activities are information-intensive. People need to know accounts have been settled. They need to understand how their wealth is being employed and to know that their risks are covered. Not least, the intermediaries need to understand what they are doing.

Today, banks and insurance companies are the core financial institutions. Banks manage payments systems, create most of the economy’s money, are responsible for a large proportion of financial intermediation, are creators of financial instruments and act as market-makers and agents. Similarly, insurance companies play the central role in assessing and managing risks.

Why might one hope that new financial technology, or “Fintech” as it is known, will transform these businesses? The answer, especially for banking, is that they are currently not done very well. Banking seems inefficient, costly, riddled with conflicts of interest, prone to unethical behaviour, and, not least, able to generate huge crises.

In a recent speech on the possibilities for a financial revolution, Andrew Haldane of the Bank of England notes that, astonishingly, the unit cost of US financial intermediation seems to be unchanged over a century (see chart). Moreover, income from finance simply rises and falls with the value of assets. That suggests a huge amount of rent-

extraction. Additionally, 10m US households and 1.5m UK adults still have no bank accounts. Worldwide, banks generate a staggering $1.7tn in revenue, 40 per cent of the total, from the job of making payments. In the computer age, settlement can still take hours or days.

On behaviour, as John Kay has written, “parts of the financial sector today . . . demonstrate the lowest ethical standards of any legal industry”. The payment of vast fines seems to be viewed as just a cost of doing business. Finally, the post-2007 banking crises were as big as any in the past. That their economic impact was not still worse than earlier was due to the willingness of governments to bail banks out.

New technology might help change this in at least two ways. First, it might transform payments. One possibility is real-time settlement via distributed ledgers. The advantages of instantaneous settlement are evident. The advantage of distributed ledgers, an element in bitcoin’s “blockchain” technology, is an improvement in the robustness of record-keeping. Instead of centralised accounts, the database would be shared across a network of sites, all of which would hold an identical copy. Such technologies might revolutionise domestic and foreign payments. Many businesses are already pursuing this possibility.

A second transformation might be via peer-to-peer lending, in which new platforms disintermediate the traditional businesses in matching savers with investments. Such lending is growing rapidly (see chart). The theory here is that computerised information might allow savers to dispense with the (costly) services of bankers altogether.

Optimists imagine a future in which payments, the creation of money (unquestionably liquid and safe assets), and intermediation would be separated. In this case, the capacity of the banking sector to create havoc would be reduced and so would the perils created by the state’s backstop to private institutions. It is, however, far too early to be confident of such benefits. Indeed it is easy to see that new record-keeping and payments systems would create huge security issues. Similarly, opportunities for malfeasance also exist on peer-to-peer platforms. Indeed, these are inevitable with transactions that rest on promises against an inherently uncertain future.

A further potential source of transformation is via “big data”. That might transform the quality of lending, for example, which would be a good thing. But the most striking effects are likely to be in insurance. With new monitoring devices, insurers might gain direct knowledge of the quality of driving or of the state of their clients’ health. Such information might be used to motivate improvements in behaviour. But it is also possible to imagine improvements in information so profound that risk pools — the basic building blocks of insurance — disappear. If, for example, the insurer knew with a high level of certainty that some customers would get a given disease, that person might become uninsurable. In insurance, some ignorance is bliss. At the least, the way in which knowledge is obtained and used could create huge social questions.

On balance, the opportunities afforded by the application of information technologies to our financial system seem large. The difficulty might rather be to ensure that the benefits accrue this time to the public rather than to a small number of incumbents or even to their more dynamic replacements. Finance, particularly banking, does need a revolution. But this is one area where policymakers cannot just assume things will work out well. It is because finance is so important that a revolution is needed. But for that very reason the revolution also requires careful watching.

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Who Makes What?

From Bahamian crawfish to Mexican shoes, and from Argentine soybeans to Ethiopian coffee, the world makes (and trades) in far more than just crude oil and petroleum products. However, given the current deflationary world, it is very notable how many countries in the world are dependent on commodities as the primary source of foreign income.

The following map of the world shows each country's major export...

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Online retailing in India

The great race

In the next 15 years, India will see more people come online than any other country. E-commerce firms are in a frenzied battle for their custom

  

IT IS a quiet morning on the outskirts of Mumbai, the air still mild. Dusty streets are dappled with sunlight, a stray dog rummages through some rubbish, the shutters are lifted on a few tiny shops. A man pushes a cart bearing a pyramid of oranges. And a delivery boy named Anil is already racing along his route on a motor bike borrowed from his uncle, his delivery backpack as large as he is. He has been up for hours, planning his route and carefully filling his bag with the packages to be dropped off first stacked near the top.

Anil enters a block of flats, squeezes his backpack into a narrow lift and delivers a shirt to a 21-year-old taxi driver. In a neighbouring tower he hands a smartphone case to a 16-year-old who uses several apps to do the shopping for his family. A short ride away, a 78-year-old grandmother is a particularly pleased customer—with help from her grandson, she has bought some clay pickling jars that she couldn’t find elsewhere and some high-quality saris at a knock-down price. For Anil, it is gruelling work. But he is betting that e-commerce in India has nowhere to go but up, and he wants to ride up with it.

In the next 15 years India will see more people come online than any other country. Last year e-commerce sales were about $16 billion; by 2020, according to Morgan Stanley, a bank, the online retail market could be more than seven times larger. Such sales are expected to grow faster in India than in any other market. This has attracted a flood of investment in e-commerce firms, the impact of which may go far beyond just displacing offline retail.

India’s small businesses have limited access to loans; most of its consumers do not have credit cards, or for that matter credit. The e-commerce companies are investing in logistics, helping merchants borrow and giving consumers new tools to pay for goods. Amit Agarwal, who runs Amazon.in, holds out the hope that “We could actually be a catalyst to transform India: how India buys, how India sells, and even transform lives.”

The jewel in the crown

Amazon wants to make India its second-biggest market, after America. For the time being, though, with just 12% of the market, it lags behind the home-grown successes, Flipkart (45%) and Snapdeal (26%). All three, as well as some smaller competitors, are spending at a blistering rate. As global markets dip and Silicon Valley unicorns stumble, the international funding that makes this possible may dry up. Doubts about the sustainability of the companies’ present plans were underlined when, on February 26th, one of Morgan Stanley’s mutual funds marked down the value of its stake in Flipkart by 27%. If the prospect of changing India a billion deliveries at a time is a beguiling one, it is not for the faint-hearted.

India’s visionaries keep their spirits up by remembering the example of China. Chinese e-commerce grew by nearly 600% between 2010 and 2014, making the country the biggest e-commerce market in the world today. It managed this largely through the growth of indigenous companies: mighty Amazon merely nips at the heels of home-grown giants Alibaba and JD.com; eBay has all but left the stage. And in the process China’s top e-commerce firms came to offer an astonishing range of services.

Alibaba, founded by Jack Ma in 1999 and now valued at $184 billion, provides the best illustration. To calm anxieties about buying online Alibaba created Alipay, which holds a shopper’s payment in escrow until he receives his order. The tool has evolved into a financial-services company, Ant Financial, which last year serviced more than 400m Alipay accounts and made over 2m loans to small businesses and entrepreneurs. To provide Chinese consumers with access to foreign goods the firm’s services include not just online listings but marketing, shipping and help with customs.

Alibaba is now building service centres in remote areas where shoppers can order, pick up and sell goods, as well as pay their bills. It is a further step in its attempts not merely to benefit from the growth in Chinese consumption, but to shape and accelerate it. The degree to which it has succeeded suggests that the earlier an e-commerce company arrives in a country’s development, the wider its role might be.

India is in many ways a tougher market for e-commerce than China. Its population is poorer and its infrastructure worse. But its prospects look remarkable. Income per person, which in 2014 was $1,570, could be twice that by 2025. Two-thirds of Indians are younger than 35, and their phones give a huge number of them access to the internet. In December 2014 smartphones accounted for one in five Indian mobiles, according to Goldman Sachs. Just six months later, they accounted for one in four (see chart 1). Morgan Stanley expects internet penetration to rise from 32% in 2015 to 59% in 2020. By 2030, India is projected to be a one-billion-person digital market.

The prospect of a second market growing to a near-Chinese size attracts those who made a packet the first time round. Bob van Dijk, the chief executive of Naspers, a South African firm that backed JD.com and Tencent, China’s largest social-media company, says he looks for countries with big populations, rising smartphone use and few retail chains. India, where malls, supermarkets and branded chains, or what analysts call “organised retail”, account for just 10% or so of the total market, fits the bill perfectly.

The middlemen

Naspers owns a 17% stake in Flipkart; other JD.com investors, including Tiger Global Management, in New York, and DST Global, a Russian fund, have also backed the company. Japan’s SoftBank, a big investor in Alibaba, has backed Snapdeal since 2013, and Alibaba itself followed suit last August. Meanwhile Alibaba’s Ant Financial owns a 20% stake in India’s Paytm, which began as a mobile-wallet company and now competes with Snapdeal and Flipkart as an online marketplace. The three firms have a combined valuation of almost $25 billion.

In contrast to those investors trying to recapitulate their Chinese success, Amazon is seeking to make up for its failure. Reduced last year to the ignominy of having to open a shop on Alibaba’s Tmall site, Jeff Bezos is determined that this time, with more experience and in a more open market, things will be different.

When Flipkart was founded, in 2007, Amazon was obviously its model. The company began as a bookseller; the two engineers who started it, Sachin Bansal and Binny Bansal (not related), had worked for Amazon. Mr Bezos, though, is of the opinion that if anyone if going to be the Amazon of India, it should be Amazon. In 2014, shortly after Flipkart announced a $1 billion round of funding, Mr Bezos donned Indian clothes in Bangalore, hopped aboard a rainbow-coloured truck and handed Mr Agarwal a $2 billion cheque. A firm which earned over $100 billion in 2015 and has shareholders content to see more or less nothing by way of profits can afford such largesse.

Neither Flipkart, Amazon, nor any of the other big competitors are following the retail strategy that led to Amazon’s success in the West. Indian regulations bar foreign-backed e-commerce firms from owning inventory, and so acting as a straightforward retailer is not an option. As a result India’s top e-commerce companies look much more like Alibaba. Flipkart has become a marketplace where sellers offer everything from mobile phones to washing machines to handbags. Snapdeal, Amazon and Paytm run marketplaces too. The firms compete feverishly on price, offering discounts that chomp away their own margins. In the long term, they must differentiate themselves by honing services for sellers and shoppers alike, and offering a better, broader range of products to more Indians than would have them otherwise.

The first step to that goal is to boost the number of sellers on the company’s platform—it is the sellers, after all, who pay commissions and shipping fees. So companies offer a range of services to lure businesses to their sites. Flipkart’s programmes range from teaching sellers how to manage peak sales during diwali to advising fashion brands on trends and production. In February Amazon announced a travelling studio-on-wheels, offering training, photography and other services to help shop-owners come online.

But the most important help they offer is in easing access to credit. Small businesses, given their scarce financial statements and limited credit history, have long had trouble obtaining loans from India’s banks. They often rely on expensive loans from neighbours or family. The e-commerce companies have strong incentives to make them better offers—and because they have access to online-sales data they are in a privileged position from which to help lenders judge credit risk.

Take Sumit Agarwal (no relation to Amazon’s Mr Agarwal), a young entrepreneur who started an online shoe business in 2011. In his warehouse in New Delhi workers pack and scan shipments among towers of shoeboxes. The early days were uncertain; his family’s reaction when the firm started, he says, was “What the hell is this guy doing?” Now it is easier for such entrepreneurs to find the capital with which to grow. When Mr Agarwal logs into his seller’s account on Amazon.in his screen offers a column of short-term loans, their rates calculated using data from his transactions. Other e-commerce firms have similar schemes. In January Snapdeal announced that the State Bank of India would approve loans of up to $37,000 instantly if it liked the look of the data that Snapdeal provided on the borrower.

Once a site has sellers, the second challenge is to help consumers buy their wares. Anil carries a clunky credit-card reader with him on his rounds, but most people pay cash. The e-commerce sites want to change that. Paytm lets customers add money to a digital wallet that can then be used to shop online, top up a mobile phone, lend money to a friend, pay a bill or use a service such as an Uber taxi. It has 120m digital-wallet accounts, nearly six times India’s number of credit cards. Snapdeal bought its own mobile payments company in April. Amazon purchased an online-payments service in February.

A fine balance

If a consumer does buy a product, the next task is delivering it. Delivery itself is nothing new. Indians have long been able to have a delivery boy from the local kirana—the cornershops that dominate Indian retail—bring them a stick of butter. But being able to deliver on a larger scale is a challenge. The country’s mail service, India Post, is ill-equipped to wait while a shopper tries on a kurta and ponders returning it. So newcomers are building networks. But India’s traffic is hellish and its addresses vague.

A startup named Delhivery has hired more than 15,000 staff, from developers to executives poached from Facebook and posh consultancies. Its headquarters in Gurgaon are so packed that engineers spill onto an outdoor porch, tapping their keyboards furiously. Delhivery, which works with a number of e-commerce firms, is using machine learning to subdivide India’s postcodes, the better to map idiosyncratic descriptions. “We’ll know the house with the yellow door next to the temple,” says Sandeep Barasia, the managing director. The company moves goods to 700 or so small distribution centres overnight to avoid congested main roads during business hours. Thousands of delivery boys then dash to and from the distribution centres throughout the day, bearing more than 20 kilos on their bikes.

E-commerce companies are devising their own solutions, too. Some investments, such as warehouses, are straightforward. Others are less so. Flipkart last year began using Mumbai’s famous network of dabbawallas, or lunch-delivery men, to drop off packages when they picked up customers’ lunch tins. Amazon has a pilot programme that lets customers order groceries online and have them delivered from the nearest kirana.

Together, e-commerce firms say, these experiments could create a new truly national marketplace. Neelkanth Mishra of Credit Suisse, a bank, points out that road construction, electrification and mobile phones have stoked big increases in rural wages, and thus demand for goods (see chart 2). Flipkart says that about half its sales come from outside India’s big cities. Snapdeal claims more than 60%. It recently launched seven regional-language versions of its website.

As they build out their markets the firms trumpet their assistance to small businesses. “Some of the big sellers on Amazon only had a shop in a corner of Bangalore; they were happy selling to five kilometres around each shop,” declares Amazon’s Mr Agarwal. “Now they are shipping orders to Kashmir and eastern India.” Amazon is helping more than 6,000 Indian businesses export, as well. Snapdeal’s Kunal Bahl is equally expansive: “Our ambition is to be a great social, economic and geographic equaliser for the small businesses of India as they scale up.”

All these bold plans are clouded by two obstinate facts. First, spending on discounts, marketing campaigns and new hires means none of the companies has yet made money. Visit any firm’s lobby and you will meet herds of job applicants. Delivery boys like Anil are in hot demand—a top performer in his branch, he earns about 14,000 rupees ($200) each month.

Amazon is, predictably, outspending its competitors. Last year its sales were two-thirds the size of its losses. Mr Agarwal is not bothered by a lack of profit. “The priority is growth,” he explains. Ankit Nagori, Flipkart’s chief business officer, says that the most important metrics for his company are not margins but the number of new customers, how often they shop, how much they buy and the speed of delivery. “If you solve for these four things,” he contends, “then the top line and bottom line will fall in place.”

A billion deliveries more

The second problem is regulatory. Forbidding foreign-backed firms from owning inventory has costs. Companies have limited control over the quality of products on their sites, points out Morgan Stanley’s Parag Gupta, and they can do little to streamline the country’s fragmented supply chain. Flipkart has become a tangle of interlinked entities, including a holding company in Singapore, in an attempt to obey India’s rules while maximising profits.

India’s government may nonetheless come under protectionist pressure. Traditional retailers allege that the online marketplaces flout rules against foreign direct investment. Facebook’s recently scuttled plan to offer Indians free internet services, including its own, sparked a furore over the risks of “digital colonialism”.

Offline retailers are watching all this intently. Kiranas are relatively protected, thanks to meagre tax bills and limited carrying costs (they store little). Big shops and malls are another story (see chart 3). “What is remarkable for me is that in a very short time, e-commerce has become half of what the organised market is,” says Abheek Singhi of the Boston Consulting Group. “Two years down the line, three years down the line, the e-commerce market could be larger.”

Big foreign retailers—such as Ikea, a Swedish furniture company, which after years of kerfuffle may finally be opening an Indian store—cannot sell directly online. Matters are simpler for Indian retailers, but their course remains cloudy. Reliance Industries, a conglomerate with over 1m square metres of shop floor, is planning its own e-commerce venture. Future Group, which pioneered hypermarkets in the country, is outfitting small shop-owners and entrepreneurs with digital catalogues so that consumers can order Future Group products in places where there will never be a store. However the firm has scaled back some of its more ambitious plans for e-commerce. “The more sales you do, the more money you lose,” muses Kishore Biyani, Future Group’s founder. “You need to have continuous funding and someone to back you.”

For the time being, the big companies in the sector are having those needs met. “You have at least three, potentially four large players with deep enough pockets,” says Mr Singhi. “It’s going to play out at a very high cost.” Companies like Alibaba and Amazon see that cost as worth paying in part because, just as they applied what they learned in China to India, so they will use their Indian experience in the next markets they move into. Alibaba, not content to back Paytm and Snapdeal, is also courting Indian businesses directly. In December it said it would help Indian firms with financing and logistics so they might use Alibaba’s platforms to export to China and beyond. Eventually, Mr Ma likes to say, any consumer should be able to buy from any seller, anywhere in the world. The more of those purchases go through one of his firms, the better.

And everywhere these giants go, home-grown entrepreneurs will be hoping that their local acumen will give them an edge and looking for overseas investors to back them. Many of them will fail: India does not yet offer an example of how to make a profit, and it may be a long time before it does. But as long as some of these efforts survive, they will serve to speed progress, and innovation, in developing markets. As Amazon’s Mr Agarwal says, “If millions of small, medium enterprises out there, manufacturers and retailers, can...sell their product anywhere in the world—that’s transformational.

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